Madras High Court
Commissioner Of Income Tax vs Sivakasi Hindu Nadars Uravinmurai on 23 January, 1995
Equivalent citations: [1996]217ITR118(MAD)
JUDGMENT Mishra, J.
1. The question before us is, whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-trust is entitled to claim exemption under s. 11 r/w s. 2(15) of the IT Act, 1961 (hereinafter referred to as "the Act").
2. The assessee is a society, registered under the Societies Registration Act and also registered as a public charitable institution with the CIT under s. 12A of the Act. It sought exemption as stipulated under s. 11 r/w s. 2(15) of the Act. The ITO, however, declined to grant exemption to it on the ground that it received income from hire of furniture and a Kalyana Mandapam, which according to him was an activity for profit. The AAC declined to interfere with the order of the ITO. The assessee appealed to the Tribunal. According to the statement of the case, the Tribunal went through the objects of the trust and found them to be clearly charitable. It did not find any element of business activity for profit in any of the objects. It found that there was no separate hire of furniture apart from letting out the Kalyana Mandampam, alongwith which the furniture was also let out. The Tribunal, accordingly, has held that the objects and activities of the assessee revealed that it was engaged in public utility services like running educational institutions, libraries, etc. According to it, the assessee is entitled to exemption under s. 2(15) r/w s. 11 of the Act.
3. The Tribunal culled out the principles to be applied in a case where exemption is claimed by institutions for charitable purposes and under the head "Advancement of an object of general public utility" as available in the judgment of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust vs. CIT , Indian Chamber of Commerce vs. CIT and CIT vs. Dharmodayam Co. and noted the principles therein as follows :
The principles that emerges from these decisions are :
(i) The criteria based on which trusts were held to be for the charitable purpose under the provisions of s. 4(3)(1) of the 1922 Act do not apply under the 1961 Act, s. 11 r/w s. 2(15).
(ii) Where the trust carried on business, there could be distinct kinds of cases; one : where the business done is the charitable purpose of the trust, two : where the business is only an asset of the trust.
(iii) If the trust is one which has as its assets or as one of several properties held by it a business so as to feed a charity but the carrying on of the business or the service to the public from the business is not claimed as charity, that does not by itself make the objects of the trust not a charitable purpose.
(iv) But if the charitable purpose itself coming under the head "Advancement of an object of general public utility" involves the carrying on of an activity for profit, the income may become taxable. In Loka Shikshana Trust's case (supra), the charitable purpose claimed was publication of newspaper so as to "improve the knowledge of the Kannada speaking people", this latter purpose cannot be achieved except by running the business of newspaper. In Indian Chamber of Commerce's case (supra), the charitable purpose aimed at was the promotion and protecting of the interest of Indian trade, such promotion being done through arbitration, issuing certificates of origin, issue of certificates of weighment and measurement, etc., for which fees were collected. Apart from those activities, such as publication of papers, setting up arbitration, issue of certificates, etc., there was no other object of general public utility in these trusts. It was not a case of the trust carrying on some activity such as business, the goods sold by the business or the service rendered by it itself not being claimed as charitable, earning income therefrom and applying the income for certain purposes claimed to be charitable. (v) Even where the serving of the purpose of general public utility involves an activity for profit, the exemption would be available in certain cases. Their Lordships of the Supreme Court in Indian Chamber of Commerce's case (supra) cautioned against a false dilemma to talk of activity for profit as against activity rendered free. The true demarcating line lies in between. "If, therefore, advancement of general public utility involved activity for profit, but was of such an extent as to balance its activities on a no profit no loss basis, subject to the limitation that mathematical attainment of a strict no profit or loss being non-attainable - there is some marginal excess or deficit that does not render the trust non-charitable". The Tribunal, on that basis, has stated :
"A natural corollary of the above tests is that the question whether a trust is for a charitable purpose or not should be determined once and for all having in view its objects and not sources of income. If some of its sources of income involve activities for profit, such as running of business, that would constitute at best a property of the trust and would not affect its charitable or otherwise nature. In determining whether the assessee is entitled to exemption under s. 11, the nature or type of the source of income of the trust is, therefore, not relevant."
4. Before saying whether the Tribunal is right or wrong, we may state that the Supreme Court, in the case of Addl. CIT vs. Surat Art. Silk Cloth Manufacturers' Association , where the assessee carried on various activities for the promotion of commerce and trade in art silk yarn, silk yarn, art silk cloth and silk cloth, considered the question referred to it directly, whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption under s. 11(1)(a) of the Act. The Constitution Bench, by a majority of 4:1, has pointed out :
"The law is well settled that if there are several objects of a trust or institution, some of which are charitable and some non-charitable and the trustees or the managers in their discretion are to apply the income or property to any of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempt from tax. In other words, where the main or primary objects are distributive, each and every one of the objects must be charitable in order that the trust or institution might be upheld as a valid charity : vide Mohd. Ibrahim vs. CIT (1930) LR 57 IA 260 and East India Industries (Madras) P. Ltd. vs. CIT . But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity; vide CIT vs. Andhra Chamber of Commerce The test which has, therefore, to be applied is whether the object which is said to be non-charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable." and "The definition of 'charitable purpose' in the Indian statute must be construed according to the language used there and against the background of Indian life. The English decisions may be referred to for help or guidance but they cannot be regarded as having any binding authority on the interpretation of the definition in the Indian Act."
Speaking on the last ten crucial words in cl. (15) of s. 2 of the Act, the majority judgment of the Bench has said :
"It is clear on a plain natural construction of the language used by the legislature that the ten crucial words 'not involving the carrying on of any activity for profit' go with 'object of general public utility' and not with 'advancement'. It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carry out the object should not involve an activity for profit. That is not the mandate of the newly added words. What these words require is that the object should not involve the carrying on of any activity for profit. The emphasis is on the object of general public utility and not on its accomplishment or attainment.... The true meaning of these last ten words is that when the purpose of a trust or institution is the advancement of an object of general public utility, it is that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit."
The Supreme Court has further observed :
"This Court thus held in no uncertain terms that if a business is held under trust or legal obligation to apply its income for promotion of an object of general public utility or it is carried on for the purpose of earning profit to be utilised exclusively for carrying out such charitable purpose, the last concluding words in s. 2, cl. (15), would have no application and they would not deprive the trust or institution of its charitable character. What these last concluding words require is not that the trust or institution whose purpose is advancement of an object of general public utility should not carry on any activity for profit at all but that the purpose of the trust or institution should not involve the carrying on of any activity for profit. So long as the purpose does not involve the carrying on of any activity for profit, the requirement of the definition would be met and it is immaterial how the monies for achieving or implementing such purpose are found, whether by carrying on an activity for profit or not."
On the question, what is the meaning of the requirement that where the purpose of a trust or institution is advancement of an object of general public utility, such purpose must not involve the carrying on of any activity for profit, the Supreme Court has pointed out :
"The activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words, it must be an integral part of such purpose. But the question again is what do we understand by these verbal labels or formulae; what is precisely that they mean ? Now there are two possible ways of looking at this problem of construction. One interpretation is that according to the definition what is necessary is that the purpose must be of such a nature that it involves the carrying on of an activity for profit in the sense that it cannot be achieved without carrying on an activity for profit. On this view, if the purpose can be achieved without the trust or institution engaging itself in an activity for profit, it cannot be said that the purpose involves the carrying on of an activity for profit. Take, for example, a case where a trust or institution is established for the promotion of sports without setting out any specific mode by which this purpose is intended to be achieved. Now, obviously promotion of sports can be achieved by organising cricket matches on free admission or no profit no loss basis and equally it can be achieved by organising cricket matches with the predominant object of earning profit. Can it be said in such a case that the purpose of the trust or institution does not involve the carrying on of an activity for profit, because promotion of sports can be done without engaging in an activity for profit? If this interpretation were correct, it would be the easiest thing for a trust or institution not to mention in its constitution as to how the purpose for which it is established shall be carried out and then engage itself in an activity for profit in the course of actually carrying out of such purpose and thereby avoid liability to tax. That would be too narrow an interpretation which would defeat the object of introducing the words 'not involving the carrying on of any activity for profit'. We cannot accept such a construction which emasculates these last concluding words and renders them meaningless and ineffectual. The other interpretation is to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words whether an activity for profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud, J., as he then was, in CIT vs. Dharmodayam Co. 'as a matter of advancement of the purpose'. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, it must be carried on in order to advance the purpose or in the course of carrying out the purpose of the trust or institution. It is then that the inhibition of the exclusionary clause would be attracted. This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by the legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making profit, there would be no scope for controversy, because the purpose would, on the face of it, involve the carrying on of an activity for profit and it would be non-charitable even though no activity for profit is actually carried on or, in the example given, no cricket matches are in fact, organised."
On the question of what is the meaning of the expression "activity for profit", the majority judgment has said :
"The answer to the question obviously depends on the correct connotation of the proposition 'for'. This proposition has many shades of meaning but when used with the active participle of a verb it means 'for the purpose of' and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit, but it must be carried on with the object of earning profit. Profit-making must be the end to which the activity must be directed or in other words, the predominant object of the activity must be making of profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of plain English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit making motive; the latter should not masquerade under the guise of the former. The purpose of the trust, as pointed out by one of us (Pathak, J.) in Dharmadeepti vs. CIT must be 'essentially charitable in nature' and it must not be a cover for carrying on an activity which has profit-making as its predominant object.... The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But, where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management."
5. The Constitution Bench has pronounced that it is not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit-making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but if it is the latter, the charitable character of the purpose would not be lost. This, however, involves in each case, an examination of not only the object of the trust, but also how the monies earned by the trust are utilised. Before granting exemption, it is necessary to see whether the trust has genuinely carried out charitable purpose and it is not masquerading under the guise of a charitable purpose. 6. By a majority of two judges in the subsequent judgments in the cases of CIT vs. Bar Council of Maharashtra and CIT vs. Federation of Indian Chambers of Commerce & Industry , the Supreme Court has reiterated the above observations of the Supreme Court in Surat Art Silk Cloth Manufacturers' Association's case (supra). A. P. Sen, J., who has given a dissenting judgment in Surat Art Silk Cloth Manufacturers' Association's case (supra), and Venkataramiah, J., have followed the majority judgment in Surat Silk Cloth Manufacturers' Association's case (supra) but expressed strong reservations to the view of the majority in the said case, in these words :
"Per A. P. Sen, J. Unfortunately, for the Revenue, the Court has, in a five judges Bench, by a majority of 4 to 1, in Addl. CIT vs. Surat Art Silk Cloth Manufacturers' Association reversed these two decisions in Loka Shikshana Trust's case and the Indian Chamber of Commerce's case . The Court has approved of the observations of Beg J. in his separate but concurring judgment in the Loka Shikshana Trust's case that 'if the profit must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust'. In other words, the majority view in Surat Art Silk's case was that the condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object. The theory of dominant or primary object of the trust has, therefore, been treated to be the determining factor, even in regard to the fourth head of charity, viz., the advancement of any other object of general public utility, so as to make the carrying on of the business activity merely ancillary or incidental to the main object.
One should have thought that the correct way to approach this question of interpretation was to give the words used by Parliament their ordinary meaning in the English language and if, consistently with the ordinary meaning, there was a choice between two alternative interpretations, then to prefer the construction that maintains a reasonable and consistent scheme of taxation without distorting the language. When the Government did not accept the recommendation of the Direct Taxes Laws Committee in Chapter 2 (Interim Report, December, 1977) for the deletion of the words 'not involving the carrying on of any activity for profit' occurring in s. 2(15) of the Act, the Court has, by a process of judicial construction, achieved the same result.
Whatever reservations one may have regarding the correctness of this interpretation of the exclusionary clause in the definition of the 'charitable purpose' in s. 2(15) of the Act, there can be no doubt that the majority decision in Surat Art Silk's case (supra) is binding on us. With respect, I venture to say that the majority decision has the effect of neutralising the radical changes brought about by Parliament in the system of taxation of income and profits of charities, with particular reference to 'objects of general public utility' to prevent tax evasion, by diversion of business profits to charities. It is the vagueness of the fourth head of charity 'any other object of general public utility' that impelled Parliament to insert the restrictive words 'not involving the carrying on of any activity for profit'. In my minority opinion in the Surat Art Silk's case, I had endeavoured to give reasons why the correctness of the majority decision was open to question. There is no point in traversing the same ground over again. It was clearly inconsistent with the settled principles to hold that if the dominant or primary object of a trust was 'charity' under the fourth head 'any other object of general public utility', it was permissible for such an object of general public utility, to augment its income by engaging in trading or commercial activities."
"Per Venkataramiah, J. There can be no objection to a person spending his money on charity. But can he be charitable at the expense of others ? This is a question which necessarily arises when we read s. 11 of the IT Act, 1961. Sec. 11, as it stands now, grants exemption from payment of tax on any income which would have otherwise been taxable, provided (1) the property yielding income is held under trust or such other legal obligation which is brought into existence by an act of party and not by an act of law, (2) the purpose of the trust is charitable which may enure to the benefit of the public or a section of the public, and (3) the other conditions prescribed by the Act are satisfied. It means that if there is a diversion of property or income-earning apparatus by an Act of party into a charitable trust and the prescribed conditions are satisfied, the income derived from it (including the portion which would have gone to the public exchequer but for the trust) may be spent by a person in charge of the affairs of the trust on objects indicated in the trust which is a creature of its author. In effect what does it mean? It means that the author of the trust is able to divert, by his own will, to a purpose of his own choice, though charitable, a large part of the income which would have been, but for the trust, at the disposal of the legislature which alone has the power over the national exchequer."
7. The Tribunal has, however, postulated that in determining whether the assessee is entitled to exemption under s. 11, the nature or type of the sources of income of the trust is not relevant, correctly but, has gone wrong in granting exemption only on the basis that the object clauses of the memorandum of association made obligatory upon it to carry on the general public utility activities like educational institutions, libraries, etc., and inferred that, there is nothing in these clauses to show that the assessee is obliged to carry on general public utility like educational institutions, libraries, etc., on a purely commercial basis and not on the marginal no profit no loss basis as laid down in Indian Chamber of Commerce's case (supra). The error is obvious. The Tribunal has not taken into account the manner in which the activities for advancing the charitable purpose are being carried on and the surrounding circumstances, which alone would show that the activities are not propelled by a dominant profit motive. This law has to be applied to answer in all cases of claim of exemption under s. 11 r/w s. 2(15) of the Act, where, having regard to all the facts and circumstances of the case, the dominant object of the activity is profit-making or carrying out a charitable purpose. The reference is answered accordingly. No costs.